Everybody is on the hunt for the perfect investment.
We want minimal risk, high returns and easy management. What we don’t realize is that those are hard to come by. Instead of constantly searching for the perfect investment you should look for something more easily attainable. A rental property is undoubtedly the best long-term investment currently available today. Some will argue for stocks, but they are far too volatile and timing them just right is often difficult. With a rental property there are several key benefits and reasons why every investor should look to add to their portfolio. Just one profitable rental can entirely change your portfolio. Here are seven reasons why rental properties make a superior investment.
- Leverage. There are a handful of situations where you can use leverage to your advantage. In the case of a real estate investment leverage allows you to put a portion of the total value down as collateral and retain 100% ownership. For anywhere between 10-25% you can own an investment property, worth multiple times your initial investment. You can’t do this with stocks, or most other financial instruments. With real estate, a small down payment can yield multiple times on your investment in the short and long term. Instead of scraping together tens to hundreds of thousands of dollars to pay for a rental property outright, you can take ownership for a fraction of the cost.
- Don’t need rehab capital. Rehabs and rental properties take a different approach to the real estate business. Rehabs are obviously more of a short-term focus, but not the biggest difference between the two. With a rehab you need upfront capital to make the necessary improvements to the property. It is not uncommon for the updates to cost tens of thousands of dollars. With a rental property you may not need to give the property a complete facelift. Not only can you pursue turnkey rental opportunities, but you can often get away with simple updates instead of remolding kitchens and bathrooms down to the studs.
- Management. Anyone that has invested in speculative stocks knows it is a minute by minute proposition. You need to be on top of every move to maximize profit. With a rental property, you can defer these duties after you take ownership. Many outsiders think that owning rentals are more trouble than they are worth. The reality is that trouble with tenants, or the property are really the exception and not the norm. You also have the option of seeking a dedicated property manager to handle the day to day options. This removes most of the headaches and hassle associated with the property and allows you to focus on running your business.
- Security/stability. People are always going to need a place to live, right? Over the past decade there has been a run on rental property demand. Homeownership is down, and rentals are on the extreme upswing. This is a trend that is not expected to change any time soon. The key is buying a rental in a good market and a prime location. By doing that you ensure that you will have a steady stream of demand for the foreseeable future. Instead of worrying about finding tenants at the end of every lease, you will have multiple interested parties’ months in advance.
- Appreciation potential. You should never buy on appreciation potential alone. As we have seen in the past, there is no guarantee that property values will rise. That being said, if you buy in the right market and have a quality property there is a good chance you will see a spike in your value. Depending on the mortgage term you can retain the property free and clear of any mortgage in 15-30 years. This allows you greatly increase your cash flow or sell and walk away with the profits.
- Equity. Equity is a moving target. As much as we are obsessed with equity, it really doesn’t matter unless you plan on selling or refinancing the property. If you do see that your property value has increased, you can use equity in your favor. For starters, you can explore the option of a cash out refinance. Your mortgage payment will rise, but you will also pay off debt or have residual cash to use in any way you like. Another option is to use the equity for a new second mortgage. An interest only HELOC is a great way to take advantage of your equity without touching the first mortgage and taking on a new set of closing costs.
- Simplicity. On the surface, running even one rental property can be intimidating. The reality is that most rental properties pretty much run themselves. If you take care of the property, spend time finding good tenants and provide periodic updates management is a breeze. It is when you get cheap, lazy or careless that you will run into trouble. The basic concept of a rental property is a tried and true practice that has been around for decades. You are not reinventing the wheel when you become a landlord.
It is not a stretch to say that there could easily be a half dozen or more tangible benefits of rental property ownership. We didn’t even touch on all the tax breaks you can receive. If you are looking for a way to invest your money, a rental property should be at the top of your list.
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